More than three months after general elections in Germany, Chancellor Angela Merkel’s conservative CDU and its Bavarian sister party the CSU start talks with the Social Democrats on Sunday to try to form a much-delayed coalition.

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Germany has been in a political impasse since the September 24 elections that saw Merkel’s party lose seats with its lowest share of the vote since 1949. The Chancellor’s first attempt to form a new government through a three-party "Jamaica coalition" – in which the CDU/CSU would join with the liberal Free Democrats (FDP) and the Greens – broke down on November 19.

Merkel said on Sunday that she is “optimistic” about negotiations with the Social Democrats (SPD). After initially ruling out a repeat of the "grand coalition" in which it governed with Merkel for the last four years, the SPD voted to engage in talks, although a pressure group called “NoGroKo” (meaning “no grand coalition”) has been formed within the party.

In an interview with FRANCE 24, Quentin Peel, Germany expert at Chatham House think tank in London, suggests that Merkel may well have grounds for her professed optimism about talks with the SPD.

FRANCE 24: The far-right Alternative for Deutschland (AfD) came third in September’s elections. How might its presence in the German parliament affect the talks between the CDU/CSU and the SPD?

Peel: One can certainly expect the AfD to be a noisy nusisance. If there is a "grand coalition", the AfD will be the largest opposition party, and it will have a good platform. But it is very fractious, very divided in terms of personalities and over policies. They could find themselves exposing divisions. If coalition talks fail and Germany goes back to elections, there is concern that the AfD could do better. But that is a moot point. Actually, the German electorate is very stability-conscious. I wouldn’t be surprised if the threat of a constantly unstable situation persuaded Germany to go back to traditional parties.

The rise of the AfD does put pressure on CSU. There are Bavarian state elections coming up, and the CSU is worried about losing votes to the AfD, so it’s becoming pretty hardline, particularly on immigration and refugees. This will be hard for SPD.

FRANCE 24: What other areas of domestic policy are important in the coalition talks?

Peel: One very interesting area is taxation. The CDU and CSU are keen to reduce taxes on business, while the SPD wants, if there are tax reductions, to have low and middle income earners paying less and high earners paying more. But there is a healthy budget situation; it has been balanced for the past four years and Germany has a €20 billion budget surplus. So there is a lot of money to spend, and that is one of the attractions of a deal. The SPD is keen for an infrastructure boost, which the CDU would not object to. The issue is a real incentive for a deal despite the difficulty of getting tax policy right longer term. I think SPD will therefore push to take the finance ministry, a concession I expect Merkel to deliver.

FRANCE 24: And on foreign policy?

Peel: On the face of it, there is more in common than dividing the two sides. All parties in the talks, on left and right, want a good European deal and support [French President Emmanuel] Macron’s agenda for future reform.

One of the other driving factors behind successful negotiations is that – when talks failed last time for the so-called Jamaica Coalition, President [Frank-Walter] Steinmeier called everybody in, and he was pressing them, saying that Germany needs a coalition because it has international responsibilities.

There is an urgency there. Europe is urgent. Other issues such as relations with America, relations with Russia, are critical. The “grand coalition” is not popular amongst party members, and the parties are natural opponents, but a sense of responsibility is driving it – particularly international responsibility.